Global Autos Update: US Thaws And BRICs Crumble

The first quarter of 2014 has seen major automotive markets behaving largely as expected, with the European upturn gaining momentum, while some of the once high-growth emerging markets lose steam. Warmer weather saw the US return to its positive growth trajectory but Japan may have seen its last month of double-digit gains.

European Growth Gathers Momentum

The large passenger car markets of Western Europe (UK, France, Germany, Spain and Italy), posted strong y-o-y increases in Q114, building on generally positive momentum from the second half of 2013. Indeed, we have become increasingly bullish on the regional outlook following substantial upward revisions to our 2014 sales forecasts for some markets, and we now forecast combined growth of 3.5% for these major markets for the full year.

Pent-Up Demand Buoys Market
Spain Monthly Passenger Car Sales (LHS) And Historical Data And Forecasts (RHS), Units

The first quarter of 2014 has seen major automotive markets behaving largely as expected, with the European upturn gaining momentum, while some of the once high-growth emerging markets lose steam. Warmer weather saw the US return to its positive growth trajectory but Japan may have seen its last month of double-digit gains.

Passenger Car Sales March 2014
Last Month Monthly Sales % chg y-o-y YTD Sales % chg y-o-y BMI End-2014 Sales BMI Full-year Growth Forecast (2014, % chg y-o-y)
Core Europe March 1,160,363 10.8 2,424,079 7.8 9,352,452 3.5
Eastern Europe March 79,850 27.6 215,724 22.0 798,741 6.9
Japan March 665,990 16.7 1,590,115 20.9 4,589,656 0.6
United States March 1,537,288 5.7 3,743,732 1.4 16,166,366 3.6
Canada March 157,060 0.2 358,392 0.9 1,789,476 2.7
Brazil March 171,359 -18.3 583,264 -4.9 2,680,806 -3.0
India* March 238,212 -7.3 2,501,466 -6.7 2,635,271 3.0
China March 1,588,792 0.2 4,747,892 7.3 19,747,648 10.2
Turkey March 37,812 -26.9 89,347 -21.9 611,483 -8.0
Russia ** March 243,335 -0.3 602,473 -2.3 2,696,158 -3.0
Source: BMI; * year-to-date is financial y-t-d, full year forecast is Apr-Mar 2015 **AEB data (includes LCVs, therefore, forecast now includes LCVs)

European Growth Gathers Momentum

The large passenger car markets of Western Europe (UK, France, Germany, Spain and Italy), posted strong y-o-y increases in Q114, building on generally positive momentum from the second half of 2013. Indeed, we have become increasingly bullish on the regional outlook following substantial upward revisions to our 2014 sales forecasts for some markets, and we now forecast combined growth of 3.5% for these major markets for the full year.

Spain continues to be an outperformer, as car sales increased 11.8% y-o-y in Q114, to 202,128 units. BMI forecasts 9% growth for the full year on the back of the recent extension of the vehicle scrappage scheme buoying sentiment. Pent-up demand from sustained declines in recent years is also a growth driver, despite the country's weak consumer story weighing on retail spending more generally. The UK is maintaining its position as the best-performing market of the group, however, with sales up 13.7% y-o-y for Q114. We do expect growth to moderate as the year goes on to end 2014 at 5.6%.

Pent-Up Demand Buoys Market
Spain Monthly Passenger Car Sales (LHS) And Historical Data And Forecasts (RHS), Units

The resurgence is also evident in Central and Eastern Europe (CEE), where a number of markets that performed poorly in 2013 are returning to positive growth. As in Western Europe, we caution that there is an element of low base effects at play here and poor consumer sentiment remains an issue. On the whole, however, we are upbeat on the region for 2014 and forecast growth of 6.9% for the CEE passenger car market.

Poland is among the outperformers with growth of 28.9% y-o-y in Q114, which we attribute to the low base of 2013, aided by gradually improving consumer sentiment. Similarly, Bulgaria, which was one of the markets to contract in 2013, posted growth of 30.4% y-o-y in Q114. We expect such rapid growth throughout the CEE markets to temper as the year goes on, given that sales improved toward the end of 2013, creating higher base effects, but for the most part we remain upbeat for the region's turnaround.

Japan Prepares For Tax Fallout

As expected, Japanese passenger car sales have achieved stellar growth in Q114, increasing 20.9% y-o-y. However, as we have pointed out previously, these are all advanced purchases before the hike in the national consumption tax in April. As such, March's growth of 16.7% should mark the end of this sustained double-digit growth as the higher tax introduced on April 1 deters consumers.

The strong start to the month means positive full-year growth should still be attainable and we forecast an increase of 0.6% for 2014. This suggests sales will fall drastically following the tax hike and leads us to forecast minimal average growth not exceeding 1% for the rest of the forecast period to 2018.

Tax Hike To Dampen Outlook
Japan Passenger Car Sales And Growth

In contrast, US sales had been expected to improve in March following a fairly weak first two months of the year, which had been attributed to harsh winter conditions keeping consumers away. When released, March results actually surprised to the upside as the overall light vehicle market rebounded to achieve growth of 5.7% y-o-y. Our view that the light truck segment will outperform is still in place, as sales of passenger cars grew just 1.0% y-o-y in March, while truck sales were up 10.7% y-o-y. For Q114, the car segment actually contracted 3.6% y-o-y while the truck segment grew 6.7% y-o-y.

We expect this trend to continue throughout the year, as new launches in the truck market support already buoyant demand. We forecast growth of 5.3% in the light truck market and 2.0% growth in passenger car sales for 2014, resulting in light vehicle sales growth of 3.6%.

China Wobble Adds To BRIC Weakness

Until now, China has been the one relative bright spot for passenger car sales among the BRIC states. In March, however, growth of just 0.2% y-o-y suggested that the slowdown impacting the total vehicle market could also be closing in on the car segment. Moreover, the slowing momentum in the market is evident from the recent statement by the secretary-general of China Passenger Car Association, Rao Da. According to Da, March started out slow before seeing a strong pickup in car sales only in the last week of the month due to Hangzhou announcing purchase restrictions for new vehicles, which spurred advance buying among consumers.

That said, we are maintaining our 2014 passenger car sales growth forecast at 10.2% for now. We believe that possible vehicle purchase restrictions in 10 or more additional cities for the rest of 2014 will support demand as consumers will look to pre-empt these curbs. At the same time, the strong comeback of luxury car brands will provide further support to passenger car sales. The initiation of a crackdown by President Xi Jinping on lavish government spending in H213 saw sales of premium marques take a hit. However, automakers seem to have put that behind them and the strong start to 2014 by many of the premium brands suggests to us that luxury car sales will enjoy strong growth for this year.

Momentum Clearly Slowing
China Domestic Passenger Car Sales And Growth

Among the other BRIC states, the pronounced contraction goes on. India ended its financial year in March with passenger vehicle sales down for the second consecutive year, falling 6.7%. As we expected, the cut in excise tax in February's budget was not enough to offset the bigger threats to sales, such as rising prices and high interest rates. Our Country Risk team believes that business-friendly market reforms are crucially needed from the newly elected government in the upcoming May elections, to accelerate Indian GDP growth in FY2014/15, which would in turn boost vehicle sales for the upcoming fiscal year.

The unwinding consumer story is also weighing on sales in Brazil and Russia. Brazilian car sales fell 4.9% y-o-y in Q114, following an 18.3% y-o-y drop in March. In addition to high sales taxes and the broader consumer spending slowdown in the country, the weak currency is making imported vehicles prohibitively expensive for many consumers. With the outlook worsening, we have revised down our sales forecast to a 3% decline from the 1% contraction projected previously.

Currency issues are also hurting Russian light vehicle sales, which declined 2.3% y-o-y in Q114. While private consumption growth was already waning in late 2013, the situation has been worsened by consumer price increases on the back of rouble weakness, which has remained depressed as a result of the ongoing Crimea crisis. For now we maintain our forecast for a 3% decline in light vehicle sales for 2014.

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